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Tesla Attempts to Calm Investors -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 3, 2017).

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Tesla Inc. worked to calm investor nerves Wednesday, stressing that orders for its two older and more expensive vehicles have accelerated lately despite the arrival of the cheaper Model 3 compact car.

In its second-quarter report, the Silicon Valley electric-car company reiterated it plans to sell more of the Model S sedans and Model X sport-utility vehicles during the second half than the first six months of the year, and it expects revenue to swell while operating costs hold steady.

The company ended the quarter with $3 billion in cash on hand after spending less during the April through June period than expected. That along with cash being generated during the second half should provide enough money to pay for Tesla's ambitious spending projects and give it enough flexibility during the Model 3 ramp up, Chief Executive Elon Musk told shareholders in a letter. He later signaled to analysts on a conference call that Tesla may tap the debt market again for more cash.

Tesla's stock has been on a tear this year -- rising more than 50% this year and sending its market value above that of Ford Motor Co. and, at times, General Motors Co.--amid enthusiasm for the Model 3. The new car, which Tesla moved into production in July, is designed to remake the company as a more mainstream auto maker, ushering in an age of more affordable and popular electric cars.

But investors and analysts have expressed concern that buyers' anticipation for the $35,000 Model 3 could cannibalize sales of the older models. Those concerns were stoked in July when Tesla reported second-quarter deliveries of the Model S sedan and Model X sport-utility vehicle came up short of analysts' expectations. The shares fell about 13% since then ahead of Wednesday's announcement.

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Tesla said Wednesday the orders for the two older vehicles in July rose 15% higher than the company's average weekly order rate during the second quarter, and orders for the Model S were increasing even more in the days after an event Friday celebrating the handoff of the first 30 Model 3s. "This growing demand gives us even more reason to expect increased deliveries of Model S and Model X in the second half of the year," Mr. Musk told shareholders.

Investors liked what they heard on Wednesday, sending Tesla's stock up over 8% in after-hours trading.

"We believe this was a better-than-expected quarter," James Albertine, an analyst for Consumer Edge Research, said in a note.

Mr. Musk was further helped by a second-quarter loss that was narrower than analysts' expectations. The Palo, Alto, Calif., company reported a loss of $336 million, compared with a loss of $239 million a year earlier. On an adjusted basis, the company's per-share loss of $1.33 beat the $1.82-a-share loss predicted by a consensus estimate of analysts surveyed by Thomson Reuters.

Revenue more than doubled to $2.79 billion, besting the analysts' average projection of $2.51 billion. Tesla said it cut its operating costs during the second quarter from the first quarter while facing higher currency costs, which contributed to its net loss increasing from the first quarter.

In recent weeks, Mr. Musk has worked to tamp down expectations for the Model 3, warning fans at Friday's event that the auto maker was entering "manufacturing hell" for the next six months as he ramps up assembly. He reiterated that comment on Wednesday's earnings call -- "When I meant production hell, I meant it"--but said investors shouldn't expect any significant negative surprises.

Mr. Musk said Friday Tesla has more than 500,000 reservations for the Model 3 and reiterated that new orders wouldn't be filled until late next year. On Wednesday, he said he misspoke. Instead, the company said it had a gross figure of 518,000 reservations and a net of 455,000 orders, suggesting 63,000 cancellations.

Greater pricing details revealed last week show buyers can pay as much as $59,500 for a version of the Model 3 with a long-range battery and other premium features. The long-range Model 3 costs $44,000 and can go 310 miles per charge, more than General Motors Co.'s Chevrolet Bolt and more than the lowest priced Model S.

In many ways, the Model 3 is aimed at the buyers of BMW AG and Daimler AG's Mercedes-Benz compact cars. The average transaction price of an entry-level luxury car in July in the U.S. was $41,831 while BMW's 3 Series sold on average for $43,023 and the Mercedes-Benz C-Class sold for $48,571, according to researcher Edmunds, which tracks new car sales.

Following the event, Tesla said it was averaging 1,800 Model 3 reservations per day.

Tesla had said Friday that nonemployee customers may receive the first Model 3s in September or October. But on Wednesday, Tesla said deliveries to nonemployees will begin in the fourth quarter. International deliveries will begin in late 2018, starting with left-hand drive markets followed by right-hand drive markets in 2019, according to Tesla.

The company didn't spend as much capital to prepare for production of the Model 3 in the first half as expected. In May, Tesla said it planned to spend $2 billion in capital expenditures but ended up spending $959 million in the second quarter after spending $553 million during the first quarter. The lower- than-expected spending was primarily because of the timing of milestone-based cash payments, Tesla said.

Tesla expects to spend $2 billion during the second half as those payments become due and as it expands its infrastructure.